Greece as the Canary in the Coal Mine for Collapse?

Much of the western media appears to view Greece as a morality play: hubris coming before a fall. But many of the elements that have brought Greece down have parallels in the larger economies: an ageing population, increased integration into the global economy, hollowing out of traditional industries, reliance on debt to sustain growth, dependence on increasing social transfers to offset inequality brought about by technological change and a widening energy import bill.

Greece joined the EU in 1981 and the eurozone in 2001 (with the drachma abolished in 2002). This chart of Greece’s GDP growth rates from eurostat shows the sharp reverse in the country’s fortunes (note that the forecast rates for 2012 and 2013 currently look hopelessly optimistic). Moreover, latest data for 2011, suggest the final figure will come in at around minus 7%.

A piece in The Atlantic places Greece’s predicament in the context of other recent major country recessions. On current trends, Greece has the potential to surpass the Latvian and Argentinan recessions.

The article chooses to leave the Soviet collapse out of the equation on the following rationale:

Russia’s GDP fell a spectacular 44% in the 1990s, but the dissolution of the Soviet Union is categorically different from a recession within a single country, so some analysts exclude it.

However, if we look at all these case studies of hard times, life for most did go on and the government continued to function. But throughout history there have been far worse outcomes. Joseph Tainter, in a path-breaking book called “The Collapse of Complex Societies” (1988), set out some of the conditions for when a country goes beyond depression and reaches a state of collapse:

Collapse is a fundamentally sudden, pronounced loss of an established level of sociopolitical complexity.

Symptoms include a downward spiral in law and order, a breakdown of educational systems, an inability to execute large infrastructure projects particularly the efficient distribution of food and energy, and a steep reduction in urban population concentrations.

Tainter’s book is in many ways an archeological and anthropological grand tour of deceased civilisations from the well-known like the Maya to the more obscure such as the Harrapan of the Indus Valley. His key point is that societies grow more complex (which is initially termed civilisation) to solve problems, but in so doing incur costs; in short, greater complexity requires more energy and more organisational expertise. Eventually, diminishing returns set in until the society in question implodes under its own weight or due to some external shock from outside.

Following the financial collapse in 2008, Tainter has been much in vogue as a commentator on the vulnerability of our current civilisation to collapse. Indeed, he recently wrote a book with Tadeusz Patzek called “Drilling Down: The Gulf Oil Debacle and Our Energy Dilemma” that used the metaphor of the Deepwater Horizon disaster to show how our need to resort to ever greater complexity to meet our energy needs was increasing risk within the system. The book is a somewhat messy read, as it jumps between detailed descriptions of what went wrong with the Deep Horizon rig and then more theoretical treatments of complexity. Nonetheless, it contains some disquieting chapters, particularly those that look at the diminishing returns to technology.

The idea that innovation and invention will lead to limitless technological growth is so central to how we view or society that no political leader ever dares question it. It also underpins the publication of all our economic institutions such as the IMF, World Bank and OECD. In Tainter’s words:

In the conventional economic perspective, resources are never scarce. They are just priced wrong. Subscribing to what has been called the Principle of Infinite Substitutability, conventional thinkers assume that, provided that markets are undistorted, innovators will respond to price signals and develop solutions to the problems of the day–whether those problems are shortages of energy or other resources, climate change, or merely a need for a competitive product.

Tainter goes on to look at the empirical literature on investment returns to technology (including studies of his own) and shows that the the idea of an ever accelerating progress in technology is nothing more than a myth (see a presentation he gave here). His conclusions are:

The productivity of of our system of innovation is declining, and has been for some time. (First noted in 1879.)

To maintain an acceptable rate of innovation, we will need to allocate more and more resources (money, people) to research and development.

Within a few years, we will be able to innovate at an acceptable rate only by taking resources from other major sectors—e.g., health care, defense, transportation, infrastructure. This cannot continue forever.

For economists, technology is the manna from heaven that supposedly never stops giving, and is the principal driver of productivity growth. If you take out productivity growth, then society as a whole suddenly loses its most powerful weapon to tackle such modern economic afflictions as an ageing society and debt (not to mention climate change).

In short, if there are more retired as a percentage of the total population, then the only way we can maintain living standards is if those working become more productive. If technology doesn’t deliver the productivity, we just become poorer. Likewise, to pay down debt ultimately requires growth.

Of course, the heavily indebted could just default. But this brings us back to the problem of complexity. As a global society, we have grown interconnected in such a way that we cannot just disengage from each other financially overnight. Most of the advanced economies have become ever more serviced orientated. Only a small portion of the things we consume are made within nation state boundaries. If the debt edifice were to topple, then no seller of goods would continue to deliver them if they believed they couldn’t get paid. Reindustrialize? That will require access to raw materials and energy—both of whose costs continue to rise to due increasing scarcity that technology has not been able to offset. It would also take time.

I would also note that energy has its own particular dynamic. As explained in my post here, the IMF is at least acknowledging the existence of alternative approaches to the importance of energy in economic growth. Economists such as Ayres and Warr make the point that much technology is predicated on the existence of cheap energy; remove the energy and you in effect disinvent the technology.

Going back to Greece, an IMF paper back in 2009 (here) shows us Greece’s situation before the crisis really accelerated. First, Greece’s demographics are the worst in Europe:

Second, the country is relies on oil for over 50% of its total primary energy supply (tpes) and 99.7% is imported. The natural gas and is all imported as well. Furthermore, oil imports had been exploding going into the crisis (table from an IEA paper here).

This oil dependency has been a key component in the country’s expanding current account deficit (from the IMF report).

Overall, the 2009 IMF report was relatively upbeat, expecting the economy to weather the downturn slightly better than other European countries, while at the same time acknowledging some fragilities.

Greece is feeling the downturn with some delay. Moreover, even with the staff’s weaker outlook relative to the authorities, Greece’s growth decline from peak to trough would still be milder than for the euro-area as a whole.

By late 2011, we have a completely different interpretation of Greece’s economic stability (here) and a typical package of IMF reforms is advocated: privatisation, cutting of red tape and more transparency, removal of barriers to investment and exports, higher labour market flexibility and a reduction in government spending. No surprises here. Yet one wonders if the IMF’s inability to recognise the severity of Greece’s structural problems as the crisis got going bodes poorly for such transitional measure to solve such problems. This goes beyond a Keynesian critique—in other words, in a country suffering from a chronic lack of effective demand, why would one slash public spending and thus entrench the downturn—but also encompasses issues of emerging long-term structural impediments to growth.

We appear to have created an ever more complex global economy in the pursuit of growth. Unfortunately, due to diminishing returns to technology and a looming resource constraint, such growth is becoming harder to come by over increasing swathes of the world. The danger is that, as with Greece, when growth stalls, an economy can’t easily find a new stable equilibrium without first undergoing a rapid decent. Moreover, if the descent is too rapid it could have sufficient momentum to unpick existing sociopolitical arrangements as Joseph Tainter has documented in countless cases in the past.

Luckily, we have few modern examples of Tainter-type collapse among relatively advanced economies in modern times. The state certainly survived the Great Depression in the US, and even prospered. Likewise, neither Latvia nor Argentina saw complete social breakdown during their crunching recessions. For a time, it could be argued that the old Soviet Union become socially unstitched as documented by Dmitry Orlov, but it can’t really be classed as total collapse because it was so temporary in nature—lasting just a few years.

Nonetheless, individual nations appear to have accepted a Faustian pact of becoming ever more integrated into the global economy in exchange for higher livings standards and better growth. Their economies have become less resilient to shocks in the name of efficiency. Richard Parker, an expert on Greece, summed up that country’s conundrum in a recent article in The Financial Times:

A third of its economy depends on tourism and international shipping; neither is “controlled” by Greece. “Modernisation” of its internal economy means the spread of large firms in place of micro-enterprises, a structural shift complicated for a small economy searching for a niche between the hyper-efficient Germans and the low-cost Chinese.

These sectors boomed on the back of a sea of cheap credit in the mid 2000s. At the same time, EU transfers and Greek private- and public-sector borrowing led to a construction and real estate binge that provided the other leg of Greece’s growth miracle. The miracle can now be viewed as a mirage.

The problem is compounded by the fact that an advanced economy needs a very efficient soft infrastructure to function properly in the modern global economy: a transparent legal system, lack of red tape, absence of corruption, fair and efficiently enforced taxation system and so on. The 20% peak to trough and counting decline in Greek real GDP means the there are far fewer stake holders in Greek society who see such things benefitting themselves. Personal economic relations are reasserting themselves with a vengeance as the economy spirals downward as it is only family and friends who provide a real safety net—the government having relinquished this role.

It is possible that the IMF could be right with its prescriptions for Greece: the market could ultimately clear, and a new equilibrium be reached from which to build growth (and higher living standards) anew. However, just as the IMF did not really understand the structural problems facing the global economy back in 2007, it is possible it does not understand the structural impediments to recovery that remain. The ever-rising oil price, for example, makes the point at which the Greek economy is able to clear its own imbalances more and more difficult to achieve.

As a consequence, there is possibly a point at which a horrible negative feedback cycle sets in: the shrunken economy ceases to be able to support the sociopolitical infrastructure that the country needs to compete in the modern global economy. At that point, we have a Tainter-style collapse.

Energy, technology, productivity, specialisation within an increasingly complex global economy—none of these things are unique to Greece. So I would be none to blase if Greece does move toward collapse. It could easily be the canary in the coal mine showing the fragility of the global economy as a whole.